EU emissions program threatened by falling prices

Europe's flagship effort to limit greenhouse-gas emissions faces an existential threat as the price of emissions has fallen dramatically, eroding an incentive for industries to pollute less and forcing policy makers to weigh environmental priorities against economic concerns.

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By SEAN CARNEY

Europe's flagship effort to limit greenhouse-gas emissions
faces an existential threat as the price of emissions has
fallen dramatically, eroding an incentive for industries to
pollute less and forcing policy makers to weigh environmental
priorities against economic concerns.

With the cost of emitting carbon dioxide often around 5 euros
($6.70) a ton -- a third of what it was 18 months ago --
utilities in the Czech Republic, Germany and Poland are
reconsidering plans to phase out coal-fired plants.

On Tuesday, the environment committee of the
European Parliament is set to vote on a proposal that would
allow the European Union to delay the release
of 900 million emissions allowances to the market
by about five years in an effort to keep the price of permits
from falling further, and eventually push it up.

The faltering of the market -- known as the EU Emissions
Trading System, or ETS, which like cap and trade programs
creates a cost to pollute and rewards low emissions -- is
calling into question its effectiveness as a model of
addressing global warming and encouraging the development of
alternative energy.

Making it more expensive to pollute by requiring companies
to buy emissions permits is central to the EU's goal of
reducing emissions by 20% in 2020 from 1990 levels. But it
would also be an unwelcome drag on a struggling economy.

That has turned decision-making on the permit scheme into a
tug of war between those most concerned with sparking growth
and those arguing that the EU shouldn't lose sight of
longer-term environmental goals.

"There is a disparity between the economic priorities and
challenges that Europe is facing and reaching more
aggressive emissions reductions," said Divya
Reddy, a Washington-based analyst for Eurasia Group who follows
climate change.

Among those arguing most loudly for the primacy of economic
concerns is Poland.

Polish Environment Minister Marcin Korolec
said his government opposes any effort to increase the price of
permits, saying that would make electricity more expensive and
threaten the country's economy, which is experiencing a sharp
slowdown in growth and rising unemployment.

"The ETS was designed as a market mechanism. I believe that
it should continue to be operated based on market rules," Mr.
Korolec said.

European Parliament members have been discussing the matter
and looking for compromises, a parliamentary aide said, adding
that the measure is expected to pass. If it does, the full
Parliament must vote on the plan -- something likely to happen
in the spring.

If the panel rejects the proposal to withhold the
allowances, and it later dies in parliament, the price of
emissions permits would likely fall below 1 euro per ton and
the market would cease to act as a serious long-term deterrent
to polluting, according to Virtuse Group Suisse, a trader of
the allowances.

Over the past five years, the price of permits has dropped
from a high of 28.70 euros a ton before the global financial
crisis started in 2008 to below 3 euros a ton last month when
the European Parliament's industrial committee rejected the
plan to delay allowances, in a nonbinding vote.

Slowing industrial production and electricity consumption
linked to Europe's widespread economic troubles have
significantly decreased demand for permits in a market already
burdened with oversupply.

Jan Pravda, director of Pravda Capital Partners, a trader of
the allowances, said that the ETS is also struggling because
European manufacturers could move operations to countries that
lack emissions trading systems, such as China or the US.

He added that flaws in the system led to theft of allowances,
value-added tax fraud and other abuses. The European Commission said it is
taking steps to resolve these lingering issues.

The question is: How deep will the cuts in the number of
allowances have to be to get the market functioning effectively
again?

"Temporarily taking 900 million tons off the market is too
little too late," Mr. Pravda said. "The real oversupply is
several billion tons and this 'backloading' isn't taking supply
off market but shifting it in time."

One possibility is for the EU to set minimum prices for
permits, an approach taken by California, which held its first
auction for emission allowances in November. The average price
was $10.09 per ton, just above the $10 minimum price. The
minimum price will rise 5% each year and be adjusted for
inflation. In 2013, for example, the minimum price for a ton of
emissions is $10.71.

Ms. Reddy of Eurasia Group said that a minimum price could
prevent another crash. "But from a political perspective it
looks unlikely," she said.

What happens could well come down to a decision by Germany,
which has roughly half of the votes needed for a blocking
minority that could prevent any changes to ETS. But German
leaders appear split.

Peter Altmaier, Germany's environment minister, supports the
reduction of carbon allowances, while Economics
Minister Philipp Rosler is against any plans that would lift
power prices.

Mr. Rosler's main argument against the plan is that it would
threaten competitiveness and jobs, an Economics Ministry
spokeswoman said.

Dow Jones Newswires

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